Repurchases running at near record levels

Commentary: Companies don’t appear worried about a credit crunch

The markets in recent days have sent shivers down the spines of more than a few investors. The stock market’s decline (nearly a thousand points on the Dow Jones Industrial Average
DJIA, +0.32%
), the prospect of a Greek default, and plunging Treasury yields have conspired to raise the spectre of a replay of the Great Credit Crunch of 2008.

Greek crisis, Lehman and insiders

(3:57)

Whether it's buybacks or dividends, corporate insiders show a high degree of confidence that we're not headed into a 2008-style crisis, according to MarketWatch's Mark Hulbert, who says Greek situation isn't that similar to Lehman's plight. Laura Mandaro reports.

Corporate finance officers, however, don’t appear to be scared of any such ghost. They are returning to shareholders an increasing portion of the huge cash hoard that they amassed in the wake of that credit crunch.

If corporate financial officers did think another credit crunch like 2008’s were imminent, they would not be relaxing their holds on that cash hoard. After all, if a liquidity crisis that severe were to take place, most corporations would lose access to outside funding. Those without sufficient cash would not survive.

But, far from continuing to hoard their cash, corporations are choosing to return a lot of their cash to shareholders through programs such as share repurchases.

When I last wrote about share buybacks, almost exactly one year ago, I pointed out that, for the first half of 2010, the total dollar value of announced share repurchase programs was already running well ahead of 2009’s pace. I reported that, if this faster pace were maintained for the remainder of 2010, share repurchases for the year would total $276 billion, nearly triple 2009’s total. (Read my Jun. 11, 2010, column.)

As fate would have it, the total for all of 2010 was even higher than what I projected mid year: $300.4 billion, according to Thomson Reuters. And the total for the first half of this year is running at nearly double that pace again — $569 billion, coming close to the previous yearly record of $602 billion, which was set in 2007.

Those playing devil’s advocate might object that, if corporate officers were really confident about the future, they would be choosing to return their cash to shareholders in the form of increased dividends rather than through buybacks. That’s because companies tend not to increase their dividends unless they believe they can continue paying that heightened dividend year in and year out.

And, yet, dividend increases — though they are running well ahead of last year’s pace — don’t amount to anything like the total value of share repurchases: Among the companies in the S&P 500 index
SPX, +0.34%
, for example, dividend increases so far this year have increased total payouts by around $25 billion.

This naysaying is unfair, according to David Ikenberry, a finance professor at the University of Colorado, one of whose areas of research focus is share repurchases. In an interview, he argued that companies’ preference for repurchases over dividends has little to do with their confidence about the future. The only way it would make sense for them pay out a big portion of their cash hoard in the form of higher dividends would be if they anticipated always having that big of a pile of cash.

But, according to Ikenberry, corporate America’s huge cash hoard was their panicked response to the 2008 credit crunch, which very much was an extraordinary event. So it’s entirely to be expected that corporations are preferring repurchases over dividends as a way of now returning much of their unusually high cash levels to shareholders.

None of this guarantees that the U.S. economy will be able to avoid a replay of the 2008 credit crunch, of course. Corporate managers have been wrong before about the direction of the economy.

Still, on the theory that corporate managers have more insight into their companies’ prospects than do the rest of us, it’s at least somewhat comforting to have them on the side of the bulls.

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